Experts issue warning about disturbing trend that could soon impact real estate across US: 'Only going to get worse'

The U.S. real estate market faces growing instability as homeowners insurance becomes increasingly unaffordable and unavailable in high-risk areas like California and Florida, driven by escalating extreme weather events and insurers withdrawing from these markets. This trend is already causing real estate sales to fall through and is severely straining state-backed "insurer of last resort" programs, which are requesting significant rate hikes or imposing surcharges. Experts warn this crisis, stemming from climate change disrupting traditional risk models, is poised to worsen and spread nationally, presenting substantial systemic risk to property valuations and market liquidity.

Analysis

The U.S. real estate market faces significant systemic risk due to the escalating unaffordability and unavailability of homeowners insurance, particularly in high-risk states like California and Florida. Extreme weather events are disrupting traditional risk models, leading insurers to withdraw from these markets. This trend has already impacted real estate transactions, with 13% of California realtors reporting failed sales last year due to insurance issues, more than double 2023's rate.

The withdrawal of private insurers is severely straining state-backed "insurer of last resort" programs, such as California's FAIR Plan and Florida's Citizens Property Insurance Corporation. The FAIR Plan recently requested a 35.8% rate hike, while Citizens, which now covers hundreds of thousands of policyholders, wins over 90% of disputed claims in arbitration. These state programs can impose surcharges on all policyholders, effectively socializing the increasing costs of climate-related risks.

Experts, including Patrick Blandford of Green Shield Risk Solutions, warn that this "insurability crisis" is likely to worsen, especially in California post-January's moratorium expiration, and could spread nationwide by 2026. The inability of the insurance industry to adapt to increasing disaster frequency, coupled with practices like using credit scores for rates in some states, disproportionately impacts low-income homeowners. This creates a significant headwind for property valuations and market liquidity in affected regions.

Key Decisions for Investors

• Investors should assess property exposure in high-risk regions, particularly California and Florida, for escalating insurance costs and potential liquidity challenges.
• Monitor legislative and regulatory responses to the insurance crisis, as policy changes regarding state-backed plans or pricing oversight could significantly alter market dynamics.
• Evaluate the long-term viability of real estate investments in areas prone to extreme weather, considering the increasing burden of insurance premiums and the potential for reduced property valuations.